Category Archives: Financially Distressed

Gut Punches for Healthcare and Hospitals

Posted on by • Posted in 2026 Mid Term Election Issues, 2028 Election Issues, Bankruptcy, Center for Medicare and Medicaid Services (CMS), Deferred Healthcare, Financially Distressed, Health Insurance Coverage Adequacy, Health Policy, Health System, Healthcare Industry, Hospital, Hospital Industry, Medicaid Cuts, Medical Debt, Out of Pocket Expenses, Politics, Profit, Profit Margin, Profit Model, Profit Motive, Public Opinion, Public Perception, Shareholder Expectations, Sign of the Times, Underinsured, Uninsured, Wall Street • Tagged , , , , • Leave a comment
Gut Punches for Healthcare and Hospitals: The One Big Beautiful Bill Act and the CMS Proposed Rule

The healthcare industry is still licking its wounds from $1 trillion in federal funding cuts included in the One Big Beautiful Bill Act (OBBBA) signed into law July 4.

Adding insult to injury, the Center for Medicare and Medicaid services issued a 913-page proposed rule last Tuesday that includes unwelcome changes especially troublesome for hospitals i.e. adoption of site neutral payments, expansion of hospital price transparency requirements, reduction of inpatient-only services, acceleration of hospital 340B discount repayment obligations and more.

The combination of the two is bad news for healthcare overall and hospitals especially: the timing is precarious:

  • Economic uncertainty: Economists believe a recession is less likely but uncertainty about tariffs, fear about rising inflation, labor market volatility a housing market slowdown and speculation about interest rates have capital markets anxious. Healthcare is capital intense: the impact of the two in tandem with economic uncertainty is unsettling.
  • Consumer spending fragility: Consumer spending is holding steady for the time being but housing equity values are dropping, rents are increasing, student loan obligations suspended during Covid are now re-activated, prices for hospital and physicians are increasing faster than other necessities and inflation ticked up slightly last month. Consumer out-of-pocket spending for healthcare products and services is directly impacted by purchases in every category.
  • Heightened payer pressures: Insurers and employers are expecting double-digit increases for premiums and health benefits next year blaming their higher costs on hospitals and drugs, OBBBA-induced insurance coverage lapses and systemic lack of cost-accountability. For insurers, already reeling from 2023-2024 financial reversals, forecasts are dire. Payers will heighten pressure on healthcare providers—especially hospitals and specialists—as a result.

Why healthcare appears to have borne the brunt of the funding cuts in the OBBBA is speculative: 

Might a case have been made for cuts in other departments? Might healthcare programs other than Medicaid have been ripe for “waste, fraud and abuse” driven cuts? Might technology-driven administrative costs reductions across the expanse of federal and state government been more effective than DOGE- blunt experimentation?

Healthcare is 18% of the GDP and 28% of total federal spending: that leaves room for cuts in other industries.

Why hospitals, along with nursing homes and public health programs, are likely to bear the lion’s share of OBBBA’ cut fallout and CMS’ proposed rule disruptions is equally vexing.  Might the high-profile successes of some not-for-profit hospital operators have drawn attention? Might Congress have been attentive to IRS Form 990 filings for NFP operators and quarterly earnings of investor-owned systems and assume hospital finances are OK? Might advocacy efforts to maintain the status quo with facility fees, 340B drug discounts, executive compensation et al been overshadowed by concerns about consolidation-induced cost increases and disregard for affordability? Hospital emergency rooms in rural and urban communities, nursing homes, public health programs and many physicians will be adversely impacted by the OBBBA cuts: the impact will vary by state. What’s not clear is how much.

My take:

Having read both the OBBBA and CMS proposed rules and observed reactions from industry, two things are clear to me:

The antipathy toward the healthcare industry among the public  and in Congress played a key role in passage of the OBBBA and regulatory changes likely to follow. 

Polls show three-fourths of likely voters want to see transformational change to healthcare and two-thirds think the industry is more concerned with its profit over their care: these views lend to hostile regulatory changes. The public and the majority of elected officials think the industry prioritizes protection of the status quo over obligations to serve communities and the greater good.

The result: winners and losers in each sector, lack of continuity and interoperability, runaway costs and poor outcomes.

No sector in healthcare stands as the surrogate for the health and wellbeing of the population. There are well-intended players in each sector who seek the moral high ground for healthcare, but their boards and leaders put short-term sustainability above long-term systemness and purpose. That void needs to be filled.

The timing of these changes is predictably political. 

Most of the lower-cost initiatives in both the OBBBA changes and CMS proposals carry obligations to commence in 2026—in time for the November 2026 mid-term campaigns. Most of the results, including costs and savings, will not be known before 2028 or after. They’re geared toward voters inclined to think healthcare is systemically fraudulent, wasteful and self-serving.

And they’re just the start: officials across the Departments of Health and Human Services, Justice, Commerce, Labor and Veterans Affairs will add to the lists.

Buckle up.

Senate report slams private equity’s ownership of hospitals

Posted on by • Posted in Bankruptcy, Financial Performance, Financial Stewardship, Financial Viability, Financially Distressed, Health System, Hospital, Hospital Industry, Mergers & Acquisitions, Private Equity, Profit, Profit Motive, Public Interest, Sign of the Times • Leave a comment
https://www.healthcarefinancenews.com/news/senate-report-slams-private-equitys-ownership-hospitals?leadId=1234536&mkt_tok=NDIwLVlOQS0yOTIAAAGX5dZKgjLBathxCQDLHz6aD3H4kLZLqWzQePWFKSc-dJ1Jif2kvx5AgcBeaH8LNPehMioSSucV5Syej2RAxHpF4CiLR5zfJW28bPAFJQpVzAC2

A bipartisan Senate report on private equity ownership of two health systems shows PE investment puts a priority of profit over patient health and hospital finances.

A yearlong investigation found that patient care deteriorated at both systems, while private equity owners received millions, according to the Senate Budget Committee’s bipartisan staff report, “Profits Over Patients: The Harmful Effects of Private Equity on the U.S. Health Care System.”

The investigation was led by Senate Budget Committee Chairman Sheldon Whitehouse, D-R.I., and Ranking Member Charles E. Grassley, R-Iowa.

WHY THIS MATTERS

The report centered on the hospital Ottumwa Regional Health Center in Iowa and its operating company, Lifepoint Health in Tennessee.

Private equity company Apollo Global Management owns Lifepoint Health.

The investigation expanded to include other entities, including PE firm Leonard Green & Partners and hospital operator Prospect Medical Holdings, in which Leonard Green & Partners held a majority stake. Leonard Green & Partners (LGP) is a private equity firm in Los Angeles that owns hospitals under Prospect Medical Holdings (PMH).

“LGP and PMH’s primary focus was on financial goals rather than quality of care at their hospitals, leading to multiple health and safety violations as well as understaffing and the closure of several hospitals,” the report said.

The investigation originated from questions over the role, if any, private equity played in a series of patient sexual assaults by a nurse practitioner at the Iowa hospital. In 2022, a nurse practitioner fatally overdosed on drugs acquired at the hospital. Police discovered the nurse had sexually assaulted nine incapacitated female patients over a two-year period, the report said.

Prospect Medical Holdings owns and operates hospitals in urban and suburban areas, primarily on the East and West Coasts, including Connecticut, Rhode Island, Pennsylvania and California.

It is a previously public traded company that went private in 2010 when LGP acquired a 61% majority stake. During the course of LGP’s majority ownership, Prospect Medical Holdings acquired 16 hospitals over a span of four years. PMH has operated a total of 21 unique hospitals, the report said.

Apollo has a 97% ownership stake in Lifepoint Health, a company that owns and operates acute care hospitals in predominantly rural areas. This includes Ottumwa Regional Health Center. Apollo owns around 220 hospitals nationwide, making it the single largest private equity owner of hospitals in the United States, the report said.

Ottumwa has been under PE ownership since 2010, when it was acquired by the PE-owned hospital operator RegionalCare, which was later acquired by Apollo.

KEY FINDINGS

The report’s key findings show that LGP controlled the Prospect Medical Holding board of directors, which incentivized management to satisfy financial goals regardless of patient outcomes.

“According to documents obtained by the committee, discussion amongst PMH and LGP leadership during board meetings centered around profits, costs, acquisitions, managing labor expenses and increasing patient volume – with little or no discussion of patient outcomes or quality of care.”

Current PMH leadership has overseen the closure of eight hospitals, with three-fourths coming during or directly after LGP’s majority ownership, including four in Texas and two in Pennsylvania.

Several hospitals suffered from labor cuts, decreased patient capacity, unsafe building maintenance and financial distress, the report said.

Despite this, LGP took home $424 million of the $645 million that PMH paid out in dividends and preferred stock redemption, in addition to over $13 million in fees, leaving PMH in severe financial distress.

In order to pay investors dividend distributions, PMH was forced to take on hundreds of millions of dollars in debt, running out of cash and defaulting on its loans, the report said.

ORHC’s PE owned companies, including Lifepoint Health, have failed to fulfill at least seven promises, including legally binding ones made to Ottumwa, including those related to growth, physician recruitment, routine capital expenditures, charity care, patient satisfaction and continuation of services.

Patient volumes have decreased, likely due to long wait times in the ER, outgoing transfers, insufficient staffing and a lack of specialists, the report said. This has also resulted from having a poor reputation in the community.

Because of financial harm, OTHC is dependent on Lifepoint Health to pay its expenses.

However, Lifepoint pays Apollo $9.2 million annually in management fees, as well as a 1% transaction fee each time Lifepoint completes an acquisition, which included a $55 million fee in relation to the acquisition of Lifepoint Health in 2018.

THE LARGER TREND

PE and other private funds had less than $1 trillion in managed assets in 2004, but now manage more than $13 trillion globally. PE firms create affiliated funds with money raised from investors, such as pension funds, foundations and insurance companies. The intention is generating returns for their investors within a short period of time.

PE has grown in healthcare. In the 2010s investors spent more than $1 trillion. By 2021 PE investment had reached an all-time high of 515 deals valued at $151 billion.

ON THE RECORD

“Recent peer reviewed studies have generally found negative consequences for general acute care hospitals during the first three years of PE ownership as compared to non-PE owned hospitals, including lower quality of care, increased transfers to other hospitals, decreased staffing and higher prices,” the report said.

Gulf widens between rich and poor hospitals

Posted on by • Posted in Financial Distress, Financial Instability, Financial Performance, Financial Strength, Financial Viability, Financially Distressed, Health System, Hospital, Hospital Industry, Operating Expense Reduction, Operating Expenses, Operating Income, Operating Margin, Operating Margin Drivers, Operating Metrics, Operating Performance, Operating Revenue, Rural Health, Rural Hospital • Leave a comment
https://www.axios.com/2024/08/06/hospitals-risk-closing-operating-margins?utm_source=newsletter&utm_medium=email&utm_campaign=newsletter_axiosvitals&stream=top

Some of America’s largest hospital systems saw their financials soar in the first half of 2024. And yet, more than 700 facilities across the country still are at risk of closing.

Why it matters: 

It’s a familiar tale of the rich getting richer, as big, mostly for-profit health systems see improved margins while smaller facilities in outlying areas are barely hanging on.

  • That could worsen access for some of the most vulnerable Americans — and hasten consolidation in an industry that’s been a magnet for M&A.

The big picture: 

Health systems with big footprints, including large academic medical centers, have weathered the pandemic and economic headwinds and are seeing margins as good or better than before COVID-19.

  • Nashville-based industry behemoth HCA Healthcare posted 23% year-over-year profit growth for the quarter, revising its forecast for the rest of the year, projecting it’ll reach as much as $6 billion. It posted a 10% year-over-year increase in revenue.
  • King of Prussia, Pennsylvania-based Universal Health Services similarly reported a strong quarter, posting nearly 69% growth on its bottom line over the same period last year while Dallas-based Tenet Healthcare reported a 111% jump in its net income over the same quarter last year.

Yes, but: 

Smaller nonprofit hospitals, especially in rural areas, that made it through the crisis with the help of government aid are paring services like maternity wards and struggling to stay open.

  • “There are a lot of hospitals that survived, but their balance sheets are so weakened, their margin for error is basically zero at this point,” said Mike Eaton, senior vice president of strategy at population health company Navvis.
  • Hospitals that once could manage their expenses and the needs of communities are “going to really struggle to invest in what comes next,” he said.

Between the lines: 

The biggest health systems have benefited from less volatility, seeing stabilizing drug prices and more predictable supply chains and labor costs, per a new report from Strata Decision Technology.

  • “It’s at least something you can manage to,” Steve Wasson, Strata’s chief data and intelligence officer, told Axios.
  • Revenues already were up thanks to renegotiated contracts health systems struck with payers last year, Wasson said.
  • There also have been changes on the federal side that boosted Medicare admissions and put some hospitals in line to be reimbursed for billions in underpayments from the 340B drug discount program.

Zoom in: 

It’s all translated to operating margins that are up 17% year-to-date compared with the same time period in 2023, according to the latest Kaufman Hall National Hospital Flash Report.

  • Volumes as measured by hospital discharges per day are up 4% year-to-date.
  • Expenses per day are also up 6% year to date, including labor (4%), supplies (8%) and drugs (8%), but are far less volatile and thus easier to plan for, said Erik Swanson, senior vice president at Kaufman Hall.

But there’s a growing gulf between the top third of U.S. hospitals, which are seeing outsize growth, and the rest, Swanson said.

Threat level: A new report from the Center for Healthcare Quality and Payment Reform estimated 703 hospitals — or more than one-third of rural hospitals — are at risk of closure, based on Centers for Medicare and Medicaid Services financial information from July. Losses on privately insured patients are the biggest culprit.

  • “We’re looking at 50% of rural operating in the red. The situation is very challenging,” Michael Topchik, partner at Chartis Center for Rural Health, told Axios.
  • These smaller hospitals may still be there, but there will continue to be a steady erosion of the kinds of services they offer, such as obstetrics, cancer care and general surgery, he said.

What’s next: 

Private equity investment in rural health care is already booming and with it, prospects for service and staffing cuts.

  • The South generally has the highest concentration of private equity-owned rural hospitals, often with lower patient satisfaction and fewer full-time staff compared with non-acquired hospitals, according to the Private Equity Stakeholder Project.
  • Congress is ramping up oversight of private equity investments in the sector, though most lawmakers are loath to take steps to actually halt deals.

Tower Health inks $142M financing deal to aid financial turnaround

Posted on by • Posted in Financial Instability, Financial Performance, Financial Reserves, Financial Viability, Financial Vital Signs, Financially Distressed, Health System, Hospital, Hospital Industry • Leave a comment
https://www.beckershospitalreview.com/finance/tower-health-inks-142m-financing-deal-to-aid-financial-turnaround.html?origin=CFOE&utm_source=CFOE&utm_medium=email&utm_content=newsletter&oly_enc_id=2893H2397267F7G

West Reading, Pa.-based Tower Health has secured more than $142 million through a debt refinancing deal with bondholders, nearly doubling its days of cash on hand to almost 60 days, a spokesperson for the health system confirmed to Becker’s. 

The deal buys Tower more time to execute its financial turnaround and meet its objective of returning to profitability this fiscal year.

“This agreement secures substantial liquidity support and provides a longer-term window to advance our continued financial turnaround efforts,” Tower said in a statement shared with Becker’s. “These efforts are already gaining traction and yielding significant positive outcomes.”

As part of its turnaround efforts, Tower has closed two hospitals, laid off workers, and sold or closed multiple urgent care centers in Pennsylvania. It also will transition revenue cycle operations, patient access services, utilization review and physician advisors to Ensemble, effective July 1. The move will see about 675 Tower employees move to Ensemble. 

The health system reported a $27.4 million operating loss for the nine months ending March 31, improving on the $122.8 million loss reported during the same period the prior year. Its long-term debt stands at more than $1.2 billion, according to its most recent quarterly report. 

The refinancing was backed by the “vast majority” of Tower’s bondholders, a significant endorsement of its financial recovery plan, according to the nonprofit health system. Tower did not disclose a specific bondholder, but said the group represents some of the largest institutional asset managers in the U.S. 

“[The refinancing deal] underscores their confidence in our strategy and affirms that we are on a positive trajectory,” according to the health system.

Tower was formed in 2017 after the formerly named Reading Health System acquired five Pennsylvania hospitals from Franklin, Tenn.-based Community Health Systems. The transaction included Reading Hospital in West Reading; Brandywine Hospital in Coatesville; Chestnut Hill Hospital in Philadelphia; Jennersville Hospital in West Grove; Phoenixville Hospital in Phoenixville; and Pottstown Hospital in Pottstown.

Tower recently closed Brandywine Hospital and Jennersville Hospital. Its plan to sell Brandywine Hospital to Philadelphia-based Penn Medicine fell through earlier this year. 

The health system now includes more than 1,200 beds across its remaining hospitals as well as St. Christopher’s Hospital for Children in Philadelphia, in partnership with Drexel University, according to its website.

Steward Files for Bankruptcy and It Feels All Too Familiar

Posted on by • Posted in Bankruptcy, Failure, Financial Advisor, Financial Benchmarks, Financial Forecast, Financial Literacy, Financial Planning, Financial Reserves, Financial Stewardship, Financial Strength, Financial Viability, Financial Vital Signs, Financially Distressed, Health System, Hospital, Hospital Industry, Investment Banking, Leadership, Leadership Culture, Leadership Implementation, Leadership Investment, Leadership Preparation, Leadership Vision, Strategic Balance Sheet Management, Strategic Leadership, Strategic Plan, Strategy Sustainable Long Term • Leave a comment

https://www.kaufmanhall.com/insights/blog/steward-files-bankruptcy-and-it-feels-all-too-familiar

Steward Health Care’s Chapter 11 bankruptcy filing on May 6, 2024, brought back bad memories of another large health system bankruptcy.

On July 21, 1998, Pittsburgh-based Allegheny Health and Education Research Foundation (AHERF) filed Chapter 11. AHERF grew very rapidly, acquiring hospitals, physicians, and medical schools in its vigorous pursuit of scale across Pennsylvania. Utilizing debt capacity and spending cash, AHERF quickly ran out of both, defaulted on its obligations, and then filed for bankruptcy. It was one of the largest bankruptcy filings in municipal finance and the largest in the rated not-for-profit hospital universe.

Steward Health Care is a for-profit, physician-owned hospital company, but its long-standing roots were in faith-based not-for-profit healthcare. Prior to the acquisition by Cerberus Capital Management in 2010, Caritas Christi Health Care System was comprised of six hospitals in eastern Massachusetts. Caritas was a well-regarded health system, providing a community alternative to the academic medical centers in downtown Boston. Over the next 14 years, Steward grew rapidly to 31 hospitals in eight states, most recently bolstered through an expansive sale-leaseback structure with a REIT. Per the bankruptcy filings, the company reported $9 billion in secured debt and leases on $6 billion of revenue.

Chapter 11 bankruptcy filings in corporate America are a means to efficiently sell assets or a path to re-emergence as a new streamlined company. A quick glance at Steward’s organizational structure shows a dizzying checkerboard of companies and LLCs that will require a massive untangling. Further, its capital structure includes both secured debt for operations and a separate and distinct lease structure for its facilities, and in bankruptcy, that signals significant complexity. Bankruptcy filings in not-for-profit healthcare are less common, although it is surprising that the industry did not see an increase after the pandemic. Not-for-profit hospitals that are in distress seem to hang on long enough to find a buyer, gain increased state funding, attain accommodations on obligations, or find some other escape route to avoid a payment default or filing.

Details regarding Steward’s undoing will unfold in the coming weeks as it moves through an auction process. But there are some early takeaways the not-for-profit industry can learn from this:

  1. Remain essential in your local market. Hospitals must prove their value to their constituents, including managed care payers, especially in competitive urban markets, as Steward may have learned in eastern Massachusetts and Miami. Prior strategies of making a margin as an out-of-network provider are no longer viable as patients must shoulder more of the financial burden. Simply put, your organization should be asking one question: does a managed care plan need our existing network to sell a product in our market? If the answer is no, you need to develop strategies that make your hospital essential.
  2. Embrace financial planning for long-term viability. Without it, a hospital or health system will be unable to afford the capital spending it needs to maintain attractive, patient-friendly, state-of-the art facilities or absorb long-term debt to fund the capital. Annual financial planning is more than just a trendline going forward. The scenarios and inputs must be well-founded, well-grounded in detail, and based on conservative assumptions. Increasing attention has to be paid to disrupters, innovators, specialized/segmented offerings, and expansion plans of existing and new competitors. Investors expect this from not-for-profit borrowers. Higher-performing hospitals and health systems of all sizes do this well.
  3. Build capital capacity through improved cash flow. It is undoubtedly clear that Steward, like AHERF, was unable to afford the capital and debt they thought they could, either through flawed financial planning of its future state or, more concerning, the complete absence of it. Or they believed that rapid growth would solve all problems, not detailed financial planning, the use of benchmarks, or a sharp focus on operations. Increasing that capacity through sustained financial performance will allow an organization to de-leverage and build capital capacity.

When the case studies are written about Steward, a fact pattern will be revealed that includes the inability or unwillingness to attain synergies as a system, underspending on facility capital needs given a severe liquidity crunch, labor challenges, and a rapid payer mix shift.

Underlying all of this will undoubtedly be a failure of governance and leadership as we saw with AHERF. It will also likely indicate that one of the most precious assets healthcare providers may have is the management bandwidth to ensure strategic plans are appropriately made, tested, monitored, and executed.

While Steward and AHERF may be held up as extreme cases, not-for-profit hospital governance must continue to focus on checks-and-balances of management resources. Likewise, management must utilize benchmarks, data, and strong financial planning, given the challenges the industry faces.

A Different Way of Thinking About Hospital Closures

Posted on by • Posted in Business Model, Community, Financial Viability, Financial Vital Signs, Financially Distressed, Health System, Health Villages, Hospital, Hospital Closure, Hospital Industry, Inpatient Care, Rural Health, Rural Hospital • Leave a comment

https://www.kaufmanhall.com/insights/thoughts-ken-kaufman/different-way-thinking-about-hospital-closures

For several decades, the economics, demographics, and technology of healthcare have been fueling a trend toward closure of inpatient hospitals.

In the past ten years, from 2014 through 2023, 229 hospitals closed without being converted into other facilities, while only 118 new hospitals opened, according to data provided by MedPAC in its March 2020 and March 2024 reports to Congress.

Rural closures have generated significant concern—justifiably so due to the risk of reduced access to care. Of the 229 hospitals that closed in the past decade, 68 were rural, with an additional 48 closing and converting into other types of care facilities, according to the Sheps Center for Health Services Research at the University of North Carolina. Although the number of rural closures is high, the numbers also show that the issue is by no means confined to rural areas.

Continued closures appear to be inevitable.

Kaufman Hall’s research shows that a significant number of hospitals have signs of financial distress, with 40 percent losing money from operations and many more with unsustainably low margins. In 2023, almost one-third of announced hospital transactions involved a distressed party—the highest percentage in the past five years.

The circumstances leading to hospital closures are as serious as they are familiar: rising operating expenses, labor shortages, shifts from inpatient to outpatient care, high-cost technology, flattening reimbursement, an aging population, and population migration.

At the same time these forces are driving some hospitals toward financial distress, they can also create clinical and even safety concerns—including inpatient volume that is reduced to the point where quality may be compromised and an inability to maintain aging physical plants.

These forces are inexorable. Attempting to maintain the status quo is simply not a viable strategy. Unfortunately, a desire to protect the status quo is often what health systems encounter when attempting to close a hospital. This impulse toward protectionism is understandable. Community groups are concerned about losing access to care. Labor groups are worried about losing jobs. Political leaders are concerned about both, and about the continued economic strength of their localities.

In too many cases, these understandable concerns have the unintended consequence of keeping open a hospital that no longer effectively serves its community. In other cases, they make the process of necessary change unnecessarily painful and protracted.

The challenge for healthcare executives and community leaders alike is to figure out a new path forward—one that creates a clinically, operationally, and economically viable approach to providing needed access to high quality care but offers an alternative to complete hospital closure or to a facility continuing to exist in a state of distress.

Recently, we came across a man named Scott Keller, who has spent the past 28 years shaping and implementing what looks to me like a creative and workable path forward for many communities facing hospital closures.

The intellectual underpinning of Scott’s approach is to combine community health, economic development, and neighborhood planning. Through that lens, Scott and his team at Dynamis look to transform hospitals that are no longer viable into community hubs that he calls “Healthy Villages®.”

These hubs address a range of community needs that include some traditional healthcare services, but also social and other community services. They bring these services together—under one roof and extending into the neighborhood—into a careful system that creates an opportunity to develop new care models built on the foundation of value-based, population-based care, prioritizing health, prevention, and elimination of disparities and barriers to care. The aim is to treat the whole person in a walkable, thriving community.

At a macro level, Scott’s approach involves consolidating treatment services into a fraction of the square footage of the existing facility and leasing the remaining space to partners focused on social determinants of health, much like a successful multifaceted retail environment creates an excellent consumer experience.

From there, the hub integrates with other neighborhood partners such as senior housing providers, financial institutions for social-impact financing, and education providers to support workforce training.

Scott explained to us that the approach can be applied in settings from challenged urban neighborhoods to rural towns, at scales from neighborhoods to full towns, and in concert with initiatives such as a health system’s service-line planning. In addition, some of these hubs have unique sources of funding that support the community, funding not typically available to a traditional hospital.

Perhaps the most attractive quality of Scott’s approach is to shift the conversation about a distressed hospital from the binary close-or-don’t close to a thoughtful consideration of what it means to deliver healthcare in a setting that has difficulty supporting a particular hospital.

In doing so, Scott helps us focus on the true issue at hand. America’s economic, demographic, and technological forces are aligned in certain markets to challenge the adequacy of the traditional hospital. The question is not whether this group of hospitals will change, but how they will change.

In too many instances and too many locations, that hospital change becomes an enemy to be fought against, resulting in a transformation that is protractedly painful and that often ends poorly for all concerned. Scott’s approach is a welcome example of how organizations and communities, rather than clinging to the status quo, can apply creative thinking, broad participation, and systematic planning to shape a future that may turn out to be not an enemy, but a real and lasting improvement.

Hospitals at a Crossroad: Reactive Navigation or Proactive Orchestration?

Posted on by • Posted in 2024 Election Issues, American Hospital Association (AHA), Bankruptcy, Board, Financial Stewardship, Financial Viability, Financially Distressed, Health System, Healthcare Reform, Hospital, Hospital Industry, Leadership, Leadership Investment, Leadership Problem Solving, Leadership Transformation, Leadership Vision, Medicaid, Medicare, Public Opinion, Public Perception, Utilization Trends • Leave a comment
Hospitals at a Crossroad: Reactive Navigation or Proactive Orchestration?

This is National Hospital week. It comes at a critical time for hospitals:

The U.S. economy is strong but growing numbers in the population face financial insecurity and economic despair. Increased out-of-pocket costs for food, fuel and housing (especially rent) have squeezed household budgets and contributed to increased medical debt—a problem in 41% of U.S. households today. Hospital bills are a factor.

The capital market for hospitals is tightening: interest rates for debt are increasing, private investments in healthcare services have slowed and valuations for key sectors—hospitals, home care, physician practices, et al—have dropped. It’s a buyer’s market for investors who hold record assets under management (AUM) but concerns about the harsh regulatory and competitive environment facing hospitals persist. Betting capital on hospitals is a tough call when other sectors appear less risky.

Utilization levels for hospital services have recovered from pandemic disruption and operating margins are above breakeven for more than half but medical inflation, insurer reimbursement, wage increases and Medicare payment cuts guarantee operating deficits for all. Complicating matters, regulators are keen to limit consolidation and force not-for-profits to justify their tax exemptions. Not a pretty picture.

And, despite all this, the public’s view of hospitals remains positive though tarnished by headlines like these about Steward Health’s bankruptcy filing last Monday:

The public is inclined to hold hospitals in high regard, at least for the time being. When asked how much trust and confidence they have in key institutions to “to develop a plan for the U.S. health system that maximizes what it has done well and corrects its major flaws,” consumers prefer for solutions physicians and hospitals over others but over half still have reservations:

A Great DealSomeNot Much/None
Health Insurers18%43%39%
Hospitals27%52%21%
Physicians32%53%15%
Federal Government14%42%44%
Retail Health Org’s21%51%28%

The American Hospital Association (AHA) is rightfully concerned that hospitals get fair treatment from regulators, adequate reimbursement from Medicare and Medicaid and protection against competitors that cherry-pick profits from the health system.

It can rightfully assert that declining operating margins in hospitals are symptoms of larger problems in the health system: flawed incentives, inadequate funding for preventive and primary care, the growing intensity of chronic diseases, medical inflation for wages, drugs, supplies and technologies, the dominance of ‘Big Insurance’ whose revenues have grown 12.1% annually since the pandemic and more. And it can correctly prove that annual hospital spending has slowed since the pandemic from 6.2% (2019) to 2.2% (2022) in stark contrast to prescription drugs (up from 4% to 8.4% and insurance costs (from -5.4% to +8.5%). Nonetheless, hospital costs, prices and spending are concerns to economists, regulators and elected officials.

National health spending data illustrate the conundrum for hospitals: relative to the overall CPI, healthcare prices and spending—especially outpatient hospital services– are increasing faster than prices and spending in other sectors and it’s getting attention: that’s problematic for hospitals at a time when 5 committees in Congress and 3 Cabinet level departments have their sights set on regulatory changes that are unwelcome to most hospitals.

My take:

The U.S. market for healthcare spending is growing—exceeding 5% per year through the next decade. With annual inflation targeted to 2.0% by the Fed and the GDP expected to grow 3.5-4.0% annually in the same period, something’s gotta’ give. Hospitals represent 30.4% of overall spending today (virtually unchanged for the past 5 years) and above 50% of total spending when their employed physicians and outside activities are included, so it’s obvious they’ll draw attention.

Today, however, most are consumed by near-term concerns– reimbursement issues with insurers, workforce adequacy and discontent, government mandates– and few have the luxury to look 10-20 years ahead.

I believe hospitals should play a vital role in orchestrating the health system’s future and the role they’ll play in it. Some will be specialty hubs. Some will operate without beds. Some will be regional. Some will close. And all will face increased demands from regulators, community leaders and consumers for affordable, convenient and effective whole-person care.

For most hospitals, a decision to invest and behave as if the future is a repeat of the past is a calculated risk. Others with less stake in community health and wellbeing and greater access to capital will seize this opportunity and, in the process, disable hospitals might play in the process.

Near-term reactive navigation vs. long-term proactive orchestration–that’s the crossroad in front of hospitals today. Hopefully, during National Hospital Week, it will get the attention it needs in every hospital board room and C suite.

PS: Last week, I wrote about the inclination of the 18 million college kids to protest against the healthcare status quo (“Is the Health System the Next Target for Campus Unrest?” The Keckley Report May 6, 2024 www.paulkeckley.com). This new survey caught my attention:

According to the Generation Lab’s survey of 1250 college students released last week, healthcare reform is a concern. When asked to choose 3 “issues most important to you” from its list of 13 issues, healthcare reform topped the list. The top 5:

  1. Health Reform (40%)
  2. Education Funding and access (38%)
  3. Economic fairness and opportunity (37%)
  4. Social justice and civil rights (36%)
  5. Climate change (35%)

If college kids today are tomorrow’s healthcare workforce and influencers to their peers, addressing the future of health system with their input seems shortsighted. Most hospital boards are comprised of older adults—community leaders, physicians, et al.

And most of the mechanisms hospitals use to assess their long-term sustainability is tethered to assumptions about an aging population and Medicare. 

College kids today are sending powerful messages about the society in which they aspire to be a part. They’re tech savvy, independent politically and increasingly spiritual but not religious. And the health system is on their radar.

Steward’s bankruptcy documents reveal sprawling debt, planned hospital fire sale

Posted on by • Posted in Bankruptcy, Chapter 11, Financial Distress, Financial Instability, Financial Stewardship, Financial Strength, Financial Transparency, Financial Viability, Financially Distressed, Health System, Restructure • Leave a comment
https://www.healthcaredive.com/news/stewards-bankruptcy-documents-reveal-sprawling-debt-planned-hospital-fire/715245/?utm_source=Sailthru&utm_medium=email&utm_campaign=Issue:%202024-05-07%20Healthcare%20Dive%20%5Bissue:61826%5D&utm_term=Healthcare%20Dive

Since filing for bankruptcy Monday, Steward Health Care revealed it’s carrying more than $1 billion in debt and said its entire hospital portfolio is for sale.

At 3:30 a.m. Monday, Steward Health Care filed for Chapter 11 protections in U.S. Bankruptcy Court for the Southern District of Texas.

Eleven minutes later, Steward employees had an email waiting from their CEO, Ralph de la Torre. The CEO told his staff that industrywide economic headwinds and delays in Steward’s planned asset sales had forced the physician-owned health network to initiate restructuring proceedings.

“It is incumbent on all of us to ensure that this process has no impact on the quality care our patients, their families, and our communities can continue to receive at our hospitals,” de la Torre wrote in an email viewed by Healthcare Dive. “To the vast majority of you, operations will either not be different or improve.”

“To be clear, this is a restructuring under chapter 11; it is not a closure and it is not a liquidation,” he wrote.

The email was the first time employees had heard directly from Steward leadership about the company’s financial distress — though rumors and uncertainty about the operator had been festering for weeks, according to Marlishia Aho, regional communications director for the union 1199SEIU United Healthcare Workers East.

Leading up to Monday’s filing, state and federal lawmakers were increasingly worried about how a bankruptcy at the largest physician-led hospital operator in the country would impact access to care. 

Regulators in Massachusetts — where Steward operates eight hospitals — held closed-door strategy sessions to map out contingency in case of a bankruptcy, and workers staged rallies to protest possible hospital closures.

Steward provides care for more than 2 million patients each year across 31 hospitals and 400 facility locations, according to bankruptcy filings. The company also employs nearly 30,000 employees across its eight-state portfolio, including 4,500 primary and specialty care physicians. 

Steward’s first-day bankruptcy motions shed light on the operator’s future — and outlines its strategy for paying down its massive debt by selling assets. Here are the biggest takeaways.

Steward’s sprawling debt

Steward has earned a reputation for being cagey about its finances — to the dismay of Massachusetts Gov. Maura Healey, who accused the company of operating in a “black box” in a letter to its CEO earlier this year.

The operator has refused to file routine finances with Massachusetts regulators for years, citing a need to protect confidential business data. Even as the company shuttered hospitals this winter, regulators said Steward still dragged its feet on providing financial data, frustrating policymakers’ efforts to build out contingency plans.

“One of the good things about bankruptcy is that Steward and its CEO … will no longer be able to lie,” said Healey during a press conference Monday morning. “Transparency is really important here, and that’s why you know we’re looking forward to seeing what is in the various documents … We need clarity about debts and liabilities.”

In a slew of first-day motions, Steward now revealed it owes around $1.2 billion in total loan debts and about $6.6 billion in long-term lease payments.

Steward owes north of $600 million to 30 of its largest lenders, which include UnitedHealth-owned Change Healthcare, Philips North America LLC, Medline Industries, AYA Healthcare and Cerner.

The healthcare operator owes $289.8 million in unpaid compensation obligations, including $68 million to its own workers in unpaid employee salaries, $105.6 million in payments for physician services and $47.7 million owed to staffing agencies.

It also has approximately $979.4 million outstanding in trade obligations, of which approximately 70% are over 120 days past due.

The filings follow lawsuits from a multitude vendors — including staffing firms, consultants, medical equipment companies, electricians and marketing research companies — who said Steward reneged on payment obligations.

Steward’s interim funding tied to hospital sales

Though Steward had a consortium of six private lenders financing its asset-based loans this year, now only one lender is listed in bankruptcy filings as funding its debtor-in-possession financing: its landlord, Medical Properties Trust.

The change in vendors is notable, according to Laura Coordes, professor of law at the Sandra Day O’Connor College of Law at Arizona State University.

“Something went on to get these other lenders to drop out,” she said.

The landlord may be opting to fund Steward during bankruptcy proceedings in hopes of getting its own money back more expediently, according to Coordes.

Steward is MPT’s largest tenant and the healthcare network will owe MPT at least $6.9 billion in debt and lease obligations by 2041, according to the filings.

MPT agreed to finance $75 million debtor-in-possession financing and could fund up to $225 million more if Steward completes asset sale milestones on time.

During Tuesday morning’s first day hearing a representative for Steward told Judge Chris Lopez that all of Steward’s 31 hospitals are for sale. But to receive the $225 million from MPT, Steward has to hit aggressive sales milestones. It must host an auction for all non-Florida hospitals by June 28 and all Florida properties by July 30.

Since February, MPT executives have said there is strong interest from buyers in taking over Steward leases. However, Steward has yet to sell a hospital.

Experts have told Healthcare Dive they’re skeptical other operators would take on Steward’s leases at MPT’s current rental rates.

“Given the unaffordability of the leases and given that it hasn’t worked in the past, I do think that really material rent concessions are going to be needed to get this done,” said Rob Simone, sector head of real estate investment trusts at analyst firm Hedgeye.

Steward also signed a letter of intent to sell its physician group, Stewardship Health, to UnitedHealth. Although the deal was first announced in March, regulators have not yet begun reviewing the deal, according to David Seltz, executive director of the Massachusetts Health Policy Commission. Seltz said missing paperwork is delaying the review.

The Stewardship deal is not tied to further funding. A representative from UnitedHealth declined to comment on the pending deal and whether the bankruptcy proceeding would impact the sale.

Future of Steward

Employees have received conflicting messages about the future of Steward hospitals.

On one hand, both de la Torre and Massachusetts officials said Monday that Steward hospitals would remain open this week. However, Healey also emphasized that she wants Steward out of the state.

“Ultimately, [bankruptcy] is a step toward our goal of getting Steward out of Massachusetts,” Healey said during a press conference Monday.

Some Steward facilities may wind down during the bankruptcy proceedings, said Massachusetts Attorney General Andrea Campbell. Her office will oversee that process closely, and Steward will be required to provide licensing and notice obligations.

A healthcare worker at Steward’s Nashoba Valley Hospital told Healthcare Dive Monday she’s particularly concerned about the fate of her facility, which she says serves 14 communities but is small compared to some other hospitals in Steward’s portfolio. She doesn’t want regulators to forget about Nashoba.

“What I’m hoping for is that our state representatives and our local representatives really push to keep the hospital open,” she said. “But my concern is we get overlooked.”

State officials said they would continue monitoring Steward facilities to ensure quality care and push for the appointment of a patient care ombudsman to represent the interests of patients and employees during bankruptcy proceedings. Officials have already launched a website to offer resources about the bankruptcy process.

Still, employees are unsure of the path forward.

The Nashoba Valley Hospital employee told Healthcare Dive they’re conflicted about whether to stay at the hospital they’ve worked at for years or try to find a new position while they can.

“I’ve used the hospital since I moved out here. I’ve been living out in this area for like 25 years … I’ve brought my mother to this hospital,” the worker said. “It’s my hospital. It’s not just where I work. It’s what I use, and it’s vitally important to the community.”

Debt covenant violations tick up among nonprofit providers: report

Posted on by • Posted in Debt Service Covenants, Financial Distress, Financial Instability, Financial Reserves, Financial Stewardship, Financial Strength, Financial Viability, Financially Distressed, Health System, Hospital, Hospital Industry, Market Consolidation, Market Trends, Operating Expense Reduction, Operating Expenses, Operating Income, Operating Margin, Operating Margin Drivers, Operating Metrics, Operating Performance, Operating Revenue • Leave a comment
https://www.healthcaredive.com/news/covenant-violations-nonprofit-hospitals-credit-outlook/714912/?utm_source=Sailthru&utm_medium=email&utm_campaign=Issue:%202024-05-02%20Healthcare%20Dive%20%5Bissue:61689%5D&utm_term=Healthcare%20Dive

Since 2022, S&P Global Ratings has tracked an increase in violations of debt agreements as macro economic pressures and low operating margins challenge providers.

Dive Brief:

  • The number of nonprofit health systems violating their financial agreements with lenders or investors has increased since 2022 as providers struggle to meet debt obligations amid challenging operating conditions, according to a new report from credit agency S&P Global Ratings.
  • This year, nonprofits will continue to be at heightened risk of violating covenant agreements, or conditions of debt that are put in place by lenders. Recently, the most common violations among nonprofits have been debt service coverage — the amount of days-cash-on-hand to debt ratios — as the sector continues to weather high expenses and weak revenues.
  • Most nonprofits have recently received extra time to remedy finances in the form of waivers or forbearance agreements, but other systems have merged with more financially stable organizations to meet lending agreements, according to the report.

Dive Insight:

Financial covenant violations among nonprofits began to increase at the onset of the COVID-19 pandemic.

In the early stages of the pandemic, violations were often tied to one-time pressures on operating income, such as mandatory stoppages of services.

However, violations have since evolved and now reflect nonprofits’ struggles with ongoing labor shortages and inflationary pressures, according to the report.

Although some nonprofits have recovered financially after notching worst-ever operating performances in 2022, high expenses and labor challenges continue to plague hospitals, including a “labordemic” of both clinical and nonclinical staff that could persist through 2024 and beyond. 

Providers in the speculative rating category were more likely to have violated financial covenants over the past two years and accounted for 60% of violations in S&P’s rated universe.